Educational Articles

Using the Value Line Page: Dialing Up A Portfolio with AT&T

J. Susan Ferrara
| June 28, 2013

There is a lot to like about Dow component AT&T Inc. (T - Free AT&T Stock Report), from an investment perspective. While the telecom giant is not without flaws, it has much to offer investors. Here, we first give a brief summary of the company’s background and its present placement in the telecommunications market before discussing the attributes that make this blue chip a worthwhile selection.

AT&T’s roots can be traced back to 1876, when telephone inventor Alexander Graham Bell founded American Telephone & Telegraph Corporation. More than a century later, in the 1980’s, the U.S. Department of Justice ordered the breakup of the local Bell System in an antitrust settlement. The company, which then came to be known as Southwestern Bell Corp., was one of the seven “baby bells” born out of the split. In 1995, Southwestern Bell changed its name to SBC Communications. Over the next several years, the company acquired a slew of communications service providers, including long-distance providers and cable operators, in an effort to extend its reach into other areas of the communications sector. That helped to build up its customer base and enhance its offerings.

By 2005, SBC acquired its former parent, the original AT&T Corp., and renamed itself AT&T Inc. (its current name). The purchase was essentially part of a strategy to win corporate long-distance and IP-based (Internet-powered) business accounts. Not long after that, the telco bought BellSouth, a megadeal that would give AT&T access to the broadband market and a competitive edge over cable operators trying to dominate in that space. It eventually purchased the remaining stake of Cingular Wireless (a joint venture between AT&T and BellSouth), further penetrating the mobile phone market.

Since then, AT&T Mobility, the company’s wireless segment, has been a major source of revenues and profits, more so after Apple (AAPL) awarded exclusivity to AT&T to sell its ever-popular iPhone in 2007. Despite losing the iPhone exclusivity, as rivals Verizon (VZ -Free Verizon Stock Report) and Sprint Nextel (S), and more recently T-Mobile US (TMUS), began offering the device, AT&T has managed to stay in the wireless game. In fact, the telecom heavyweight continues to wrestle for market share, though Verizon still leads, even in terms of total spectrum (or broadband). Along with an improving broadband network and distribution agreements with key smartphone manufacturers, the company’s U-verse offering of high-speed Internet and video services, partially aimed at corporate clients, is helping to give it a boost. (Read our Dow-30 Profile for a more in-depth discussion of AT&T’s background.)

We now look to the Value Line report to gain some insight on what makes AT&T an appealing investment. For starters, note that the stock is ranked 2 (Above Average) for Timeliness (as shown in the Ranks box at the top left-hand corner of the page). This gauges an equity’s price and earnings momentum compared to the performance of the broader market, and it ranges from 1 (Highest) to 5 (Lowest).

Safety is another feature that stands out in the same section, just beneath the Timeliness rank. AT&T’s top-notch rank of 1 implies that its shares have considerably less risk than the average issue under Value Line’s review. Like Timeliness, the Safety rank ranges from 1 (Highest) to 5 (Lowest). Meanwhile, at .70, the Beta coefficient, which goes somewhat hand-in-hand with Safety, shows that the stock’s volatility is well below that of the market (where 1.00 = the market).

Other prominent features of AT&T stock can be found in the Ratings box in the lower right-hand corner. Specifically, its excellent score for Financial Strength (A++) serves to highlight the telecom giant’s strong risk profile, based on a range of items, such as a solid cash balance and manageable debt level, which can be seen in the Capital Structure and Current Position boxes to the left. Moreover, the equity gets superior marks for Stock Price Stability (100 out of 100) and Earnings Predictability (90 out of 100).

But AT&T’s attractiveness doesn’t end there. In fact, those seeking a solid income vehicle among the Dow components might well want to park their money here, as this blue chip boasts a dividend yield of 5.1% (Top Label section). The yield essentially refers to the expected return from cash distributions on the equity over the coming 12 months, if purchased at the recent price. As evidenced in the Statistical Array (midsection of the page), dividends are adequately covered by earnings, not to mention that cash flow is healthy enough to support future payouts, which is pointed out in the Commentary section by covering analyst Justin Hellman.

Summing it all up, AT&T is best suited for conservative, income-minded individuals, as well as those with a shorter investment horizon. As the analyst explains in his writeup, while there are concerns that AT&T may be facing a slowdown in the wireless business, among other challenges, “we remain optimistic about the company’s prospects”. He concludes by saying that “this high-quality issue continues to have appeal as a defensive-oriented yield play”, adding that “the timely stock would make a fine addition to many diversified portfolios.”

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.